Econometer: Worried about drop in gold prices?

FILE -In this Tuesday Oct. 9, 2012 file photo, a technician prepares 1 Kg gold bars of 995.0 purity to pack for delivery at the Emirates Gold company in Dubai, United Arab Emirates. As of Monday, April 15, 2013, gold has plunged more than 10 percent the last two days, suggesting that a decade-long surge in the metal is over. Signs that the U.S. economy is healthier are diminishing gold's appeal as an safe place to invest money. Gold peaked at $1,900 in August 2011 and is now at $1,390. (AP Pho
— AP

FILE -In this Tuesday Oct. 9, 2012 file photo, a technician prepares 1 Kg gold bars of 995.0 purity to pack for delivery at the Emirates Gold company in Dubai, United Arab Emirates. As of Monday, April 15, 2013, gold has plunged more than 10 percent the last two days, suggesting that a decade-long surge in the metal is over. Signs that the U.S. economy is healthier are diminishing gold's appeal as an safe place to invest money. Gold peaked at $1,900 in August 2011 and is now at $1,390. (AP Pho
/ AP

Q: Is the 30 percent drop in gold prices since September 2011’s high of $1,920 per ounce a cause for concern?

Panel's answer: Yes 1, No 7

After more than a decade of year-over-year gains, a correction in the price of gold seems warranted because the concerns and expectations that fueled its rise have waned. Gold plays three important roles in the marketplace: a safe haven against crisis; a potential inflation hedge; and its commercial/retail use. So, when easy money fuelled the global credit bubble, gold rose together with equities, real estate, commodities, and everything else with a price tag. Gold then continued to rise as the credit bubble exploded, reflecting its safe harbor characteristics. The fall in the price of gold may indicate expectations of moderate inflation less asset market volatility.

Yes
28% (11)

No
73% (29)

Although concerns over currency values are widespread, as far as gold retaining value is not the problem. Heavily indebted European Mediterranean countries selling part of their gold reserves caused prices to fall. Many developed countries with the most daunting debt problems, including the U.S., have relatively high gold reserves. Cash rich, but gold poor, creditor nations are eager to purchase gold from bankrupt nations selling at distressed prices. They thereby also become less dependent upon the U.S. dollar as reserve currency for international exchanges. For consumers, the decline in price may be a last great opportunity to invest in gold.

It is a problem if you are an investor in gold. Gold doesn’t pay interest or dividends, so the only return for investors is price appreciation. For non-investors, this might be a good sign. One reason for appreciation is a fear of inflation and/or political or economic turmoil. A price decline might indicate that those fears are being downplayed by investors. Despite a surge in the monetary base and commodity speculation, overall inflation remains relatively low. While the drop in gold prices might also suggest lower inflation due to a weakening economy, the outlook for growth still looks solid to me.

One factor has been new evidence of weakness of the Chinese economy, and that is certainly not a favorable development. But gold in itself is not a productive asset. It would be better if people around the world were investing in equipment, buildings, and innovation that would help improve productivity and the standard of living rather than hoarding shiny metal bars in some musty basement vault. Investors run to gold when they’re afraid of inflation and political instability. If investors have become less worried about such fears and more interested in finding productive investments, that could be a good thing.

Actually it is a cause for celebration! The rise in the speculative value of gold is an omen of a bad economy. There is an inverse correlation between the price of gold and the health of the economy. An investment in gold is a misguided, almost mean spirited statement by speculators (and a closely held cartel) who are broadcasting their lack of confidence in our economy or, for that matter, anything real. Gold is useless as a commodity, just as it was useless as a “standard”. Invest in an asset that actually produce income. A gold investment deserves a place on the shelf alongside your tulip plants. Or dangle it from your ears.